Sunday, November 18, 2007

Barron’s cover story discusses casino stocks, which are up 173%, 140% and 127% in 2ys, for Las Vegas Sands (LVS), Wynn (WYNN) and MGM (MGM), respectively. "Some investors seem to think high margins are perpetual and are disappointed when they find out otherwise, but you're starting to see margins pressured as supply gets saturated and competition increases," says Wahid Chammas, of Janus Capital. 2ys ago, Chammas advocated betting on Macau while the public wavered, but he is more circumspect today. "The story has been discovered." While Wynn and LVS have upped Macau's wow factor, nearly everyone is building and renovating. Cash-flow margins of around 30% will come under pressure with competition, possible discounting, and as all-important junkets, which bring tourists to Macau and hence control customers, lobby for a bigger slice of the take. Another correction of 25-30% would merely take LVS and Wynn to levels they were at in July, and they'd still be richer than their peers on most valuation measures. Today, even after the recent declines, LVS and Wynn sport enterprise values that are 34 and 22x their respective ‘08 Ebitda. To put that in perspective, Harra’s (HET), which has no Macau casinos, is being acquired by buyout firms at a comparable 9.9x multiple. "Betting on these stocks is like betting on the winning horse after the race," says David Trainer, of New Constructs. He thinks LVS and Wynn are overvalued. "Their current mkt valuations imply huge future cash-flow growth." Another co mentioned as “pure play on Macau” – Melco PBL (MPEL), whose shares fetch 164x ‘08 earnings.

Eli Lilly (LLY) shares look like dead money following a mixed test result for its experimental anticlotting drug. They could drop another 10% if the product doesn't generate sales.

Archer Daniels Midland (ADM) shares are too expensive, given the uncertainties about margins and earnings in the next few quarters. A 20%-30% decline would make them palatable again.

Barron’s: With earnings strong and dividend yields approaching those on Japanese government bonds, expect a rally in Japan's stock market, one of the developed world's cheapest (SNE, CAJ, TM, NMR, EWJ, JOF).

Compared with other money-management firms, Och-Ziff (OZM) looks quite overpriced. And that would hold true even if its stock were 5 to 10 points below its current price.

Sasol's (SSL) ADRs have soared about 400%, to just north of 50, since they were listed in 2003. The stock could be worth about 70 in a year if oil prices stay high.

“The Trader” section discusses EchoStar (DISH), saying that in the past, price reportedly prevented marriage with AT&T (T). AT&T supposedly has offered $65 a share, and DISH CEO Charles Ergen has demanded $75. There's no guarantee the two will reach an agreement this time, either. But compromise may come easier in the wake of EchoStar's disappointing 3Q earnings report. AT&T would like to get a deal done quickly for two reasons. First, it would like to have an agreement in place before the presidential election. Pushing a deal of this size through the regulatory system takes time, so it may have to be done in a month or so. AT&T has also said that it will decide by year end which satellite provider it will use to offer its telephone customers video services. AT&T has a joint venture with EchoStar. But BellSouth, which AT&T bough in ‘06, works with DirecTV (DTV), soon to be owned by Liberty Media. Thomas Eagan, of Oppenheimer, believes that AT&T will choose EchoStar as a partner and concurrently try to buy the co. AT&T is rolling out a new technology (U-verse) to offer TV service and compete with cable operators. However, ests of the operation's costs have risen, and AT&T has trimmed its projection of the number of homes for which the system will be available. Eagan postulates that Ma Bell will continue to roll out U-verse in metropolitan areas and buy a satellite co to provide TV service in more rural territories. A combination also would lower the co's programming costs.

“The Trader” also out saying that Colgate-Palmolive (CL) has a nice problem: Its business is doing so well and its stock has risen so strongly that its shares now appear expensive. At a recent 78.80, Colgate now trades at 20.7x ests for ‘08. The co's P/E is high compared to its 13% earnings growth and trumps those of other personal-care players. "The whole personal-care group is expensive relative to the S&P 500," says Bill Schmitz, od Deutsche Bank. The group trades at a 28% premium to the mkt, which matches the highest premium it has sported over the past 10ys and is well above the 15% mean. In any case, investors would be wise to take some profits and show their pearly whites all the way to the bank.

At roughly 7x forward earnings, Barclays (BCS) looks attractive. Shares of bank have fallen more than 30% since August. The bank is due to come out with its detailed trading statement later this year. As long as its capital-adequacy ratios remain intact, Barclays may be up for a re-rating.

According to the “Plugged In” column, Google (GOOG) is playing high-stake pokker with wireless carriers. Does the co, which has designs on the mobile-phone industry, really want to go to war with the likes of AT&T and Verizon? Probably not. Even though Google is one of the few co’s on the planet that could enter the wireless-service mkt and afford to build a network from scratch, I doubt that they will. It's too expensive, too time-consuming and too difficult to execute for a co with such little expertise. "What they are trying to do is pressure the carriers," posits Charter Equity Research analyst Ed Snyder. "I doubt that Google wants to own spectrum or build out a network. That would be a fool's errand," he adds. So why would Google go to such great lengths? B/c it needs the wireless carriers to play ball, and Google thinks it can force the carriers to cooperate where existing handset makers have failed. For Google to become the last entrant to mkt as a regulated wireless carrier in a mature industry wouldn't turn out well for current shareholders. They may be willing to pay for growth of the burgeoning Internet ad mkt, but they didn't intend on owning a regulated utility that needs to spend tens of billions of dollars with 5yr time horizons for return on that investment. Simply put, a move to become a wireless carrier would fundamentally destroy one of the greatest growth-stock stories of our time. The wireless carriers should call the bluff.

“Technology Trader” discusses VMware (VMW) valuation. There was a sobering piece last week from Bernstein Research analyst Toni Sacconaghi on VMware's extraordinary valuation. He noted that it is one of just two co’s (other is BIDU) in the tech and telecom sector that trade at multiples of more than 20x EV to trailing 12 mo' sales. Sacconaghi ran a screen for stocks that at any time in the ‘02-‘06 period traded at a trailing EV/sales ratio of 20 or more. He found 7 that hit that level at least once. And of those, only two, SunPower (SPWR) and XM Satellite Radio (XMSR), outperformed the mkt for a year after they topped the 20 figure. He notes that both SunPower and XM were growing at much faster rates than VMware when they reached that valuation, 200% at SunPower and 140-150% at XM, vs 65% or so for VMW. And he notes that SunPower's valuation on that measure has come down considerably, while XM shares have suffered a huge absolute fall. Other stocks that at least briefly hit the 20 level include AKAM, EBAY, RHT, RMBS and SIRI. Sacconaghi notes that most of them underperformed the mkt in both the qrtr and the yr following the point where they hit the 20 ratio, and that only two stocks, XM and Sirius, were able to maintain multiples above 20 for a yr or more. Both later traded sharply lower. Sacconaghi wasn't making a fundamental call on VMW. But he did offer a sobering warning: The valuation is at a level that other highfliers have been unable to sustain.